This involves estimating the land value based on the recent sales of similar land in the same area as the property. This information is easy to obtain in new subdivisions where there have been recent sales of almost identical land, but is more difficult to estimate in established locations where there is little vacant land.
In establishing areas, it is possible to estimate land value based on the recent sale prices of properties where the existing dwelling was removed to make way for a new construction. Calculation of the land value in these situations should also include an allowance for the cost of demolition to bring the land back to an unimproved state.
Once an estimation of the market price of the land is established, estimations are made of the improvements to the land including:
- The main building: house, warehouse, shop etc.;
- Other buildings: tool sheds, carports, free standing garages; and
- Other improvements, including: driveway, garden, irrigation system and fencing (only 50 per cent, as apart from front fences, these are shared with neighbours).
The estimations are usually based on current full-replacement value less depreciation, which is determined by the condition of the improvements. New properties that are still under building warranties attract a premium over older properties without structural guarantees.
An example of the summation method is included in Table below. The property is a 20-year-old, three-bedroom, brick-veneer home which has been maintained in good condition by the current owners who are also the original owners. Many of the features of the property, while in good condition, do reflect their age. It is estimated that, on average, the improvements have depreciated in appearance and style and are only worth approximately 75 percent of new replacement value.
Table: Summation Method